Breakeven point for an investment in S&P500 index

The recent highs of the Dow Jones Industrials Average prompted me to look into whether a lump-sum investment at the peak of the S&P 500 has reached the breakeven point. According to data from Yahoo finance, the S&P 500 reached its last peak on Mar 24, 2000, with a value of 1527.46 and the closing value of the S&P 500 on Oct 6, 2006 was 1349.59. This means that the ‘raw’ index has only reached 1349.59 / 1527.46 = 88.4% of its 2000 peak. It appears that there is more than 10% to go before the breakeven point is reached.

However, since the ‘raw’ index does not include dividends, the above conclusion is incorrect; we need to include dividends. To do this, and to use an investment easily understood and reproducible by investors (as opposed to just a hypothetical investment), I shall use the popular SPY ETF (expense ratio 0.10%) as a proxy for the actual investment returns obtainable by an investor if it were held in a tax-deferred account.

2006-10-08-sp500breakeven-480×307.png

Using data from Yahoo finance, the “adjusted close” value (“adjusted close” means that the value is adjusted for dividend distributions) of SPY on Mar 24, 2000 was $139.23. The most recent closing value of SPY (Oct 6, 2006) was $135.01, or roughly 97% of the peak. This means that the breakeven point for a lump-sum investment in the S&P 500 made on Mar 24, 2000, will be reached if the index rises by another 3% or so.

The effect of dividend distributions can be observed in the attached figure. In the figure, the ‘raw’ index values (in blue) are given on the left axis and superimposed on the right axis are the ‘dividend-adjusted’ values of the SPY ETF (in green). We can see that dividend distributions have significant effect on the returns of the investment. These should never be ignored when comparing an investment’s performance with a given index.

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